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Why Vibrant Credit Union Doubled Down On Direct Lending

The Illinois credit union phased out its indirect lending efforts and posted major gains in its auto portfolio.

When Matt McCombs became CEO of Vibrant Credit Union ($572.1M, Moline, IL) in May 2011, the cooperative’s auto loan program was almost nonexistent. It had less than $22 million in direct auto loans, $58.1 million in indirect loans, and a loan-to-share ratio of 62.9% versus 69.2% for credit unions $500 million to $1 billion in assets, according to data from Callahan & Associates.

At the time, pricing in the indirect channel was competitive in both rates and dealer reserves, so the credit union became more aggressive in capturing direct auto loans. The result? In second quarter of 2011, indirect lending at Vibrant accounted for 22.8% of total loans. At the end of first quarter 2016, it accounted for only 3.1%. Vibrant’s percentage of indirect loans versus total auto loans dropped from 72.6% to 8.5% in that timeframe.

But the journey to a fortified direct loan portfolio was not smooth.

Dealings With The Dealers

In 2011, Vibrant’s lending approach was based on the fear that dealers could stop referring indirect traffic.

“We were a little intimidated and scared of the dealers,” McCombs says. “When a member came in to the branch and wanted to buy a car, we forced our lenders to do a pre-approval. We did not allow them to do the loan and give the member a check, even if the member said, ‘I want to do this with you and not with X, Y, Z dealership.’”

In July of 2011, Vibrant launched a refinance campaign to shore up auto loan penetration within its membership base. At the time, 17.6% of members held an auto loan with Vibrant, compared with 17.1% for credit unions $500 million to $1 billion in assets.

In just three months, Vibrant went from closing $1.5 million to $2 million a month in direct auto loans to more than $30 million. Today, Vibrant’s auto loan penetration is 29.2% versus 19.9% for the 233 credit unions of a similar size.

The campaign was a success for Vibrant but unintentionally resulted in significant chargebacks to the dealers for the loans they originally sent elsewhere. On top of that, auto loan rates started dropping below 2%, so Vibrant changed what it was paying in dealer reserves in early 2012.

“We told dealers we wanted to work with them, to continue the indirect program,” McCombs says. “But our expectation was that if one of our members came in, they would send that loan to us.”

The one-two punch stressed its dealer relationships, and the fact Vibrant wasn’t paying as high a dealer reserve as the national players meant dealerships weren’t sending member loans back to Vibrant.

“In our marketplace, the dealer drives who gets the loan,” McCombs says. “When we decided to change that system, there was a lot of pushback.

By the end of 2012 and into 2013, the relationship between Vibrant and its auto dealer partners was rocky. Vibrant realized it needed to do one of two things: One, go all in on direct lending, or, two,back away from direct lending, including refinancing.

Direct lending was the better choice from a member relationship standpoint as well as a profitability standpoint. Direct lending also gave Vibrant the ability to cross-sell products and services.

So Vibrant went all in.

“It’s hard to be one foot in indirect and one foot in direct, both aggressively,” McCombs says. “I’m not opposed to indirect lending, but it’s not a loan origination channel. It’s not a loan origination strategy. It’s a supplement to your investment portfolio.”

The Results Of All In

Today, Vibrant’s loan-to-share ratio is a much-improved 95.5% versus 77.3% for credit unions with $500 million to $1 billion in assets.

Vibrant’s direct lending overtook indirect lending in the third quarter of 2012. Since then, direct lending has grown by $83.6 million. Indirect lending has dropped by $51.7 million, and the rest of Vibrant's indirect loans are running off.

As might be expected with the cessation of an indirect program, Vibrant’s member growth has decreased from 5.8 % at its peak in third quarter 2012 to -6.7% today. This is notably weaker than the 1.3% average growth reported in the first quarter by credit unions with $500 million to $1 billion in assets.

However, Vibrant’s average member relationship has increased over the same period from $18,182 to $20,164 today, compared with $16,415 for similar-sized credit unions in the first quarter. Vibrant now has a direct relationship with members, and its ability to sell ancillary service products, gap warranties, and credit insurance products has resulted in an increase from 2.2 to almost 2.6 services and products per household.

The resulting growth from Vibrant’s all-in approach prompted the credit union to transition from a decentralized to a centralized lending strategy approximately 12 months ago. One to four financial service officers staff each of Vibrant’s 10 branches. The credit union has both centralized inbound and outbound lending groups that generate between $10 million and $15 million a month, depending on the season.

Three centralized underwriters take care of the loans that are neither immediately approved nor denied based on preexisting criteria. Historically, approximately 70% of Vibrant’s loan portfolio has been in A and A+ paper, and the credit union has been able to increase volume while taking on little to no additional credit risk.

Vibrant’s overall delinquency was 0.42% as of first quarter 2016. That’s 21 basis points lower than the 0.63% average reported by credit unions with $500 million to $1 billion in assets. It reported total auto loan delinquency of 0.28%, notably lower than the 0.44% average reported by credit unions in its asset-based peer group. Total auto charge-offs, at 0.28%, is also well below peer averages, which is 0.61%.

“If I could go back and do it again, I probably would have gone all in on direct sooner,” McCombs says. “There is no question the amount of work that goes into creating a long-term loan growth strategy off of direct lending is challenging. But when we look at the ancillary products and relationships we’ve been able to form, we would do it every day.”